Generally, in order to sue for insurance bad faith there necessarily must be an insurance policy at issue that establishes a concept known as “privity of contract” between an insured and an insurer.  This means that an insured under an insurance policy typically may sue for bad faith if the insured is entitled to benefits under a policy and if those benefits are wrongfully withheld or payment was wrongfully delayed.  This includes the contracting parties (persons named as insureds) as well as others entitled to benefits as “additional insureds” or as express beneficiaries under the policy.  In insurance parlance, this means that the “named insured” and any “additional insureds” may sue.  For example, an auto liability insurance policy covering a vehicle may extend coverage to permissive users as additional insureds.

In addition, an insurance bad faith claim can be assigned.  In the context of a third party claim, it is possible to assign a bad faith claim under certain circumstances.  This is most typically done in connection with a failure by an insurer to defend and indemnify an insured for third party liability.  However, because purely personal tort claims are not assignable, the insured's claims for emotional distress damages and punitive damages are not assignable. Essex Ins. Co. v. Five Star Dye House, Inc., 38 Cal. 4th 1252, 1263 (2006).  An assignment allows the third-party to obtain more than the policy limits from the insurer.  Without the assignment, a third-party can only sue the insurer for the amount of the judgment as third party beneficiary of those liability policies.  Ins. Code § 11580(a).

The same “privity of contract” requirement applies in determining who may be sued.  Generally, only the insurer(s) on the risk as the party to the contract can be sued.  This includes “primary,” “excess” and “umbrella” insurers.  Moreover, it is possible to sue an insurer's alter ego or joint-venturer, typically a parent company.  It is also possible under certain circumstances to sue a “managing general agent” who is appointed by the insurer to manage all or part of its insurance business.  An insurance agent can be sued for professional negligence, but not for insurance bad faith.  See Kurtz, Richards, Wilson & Co. v. Insurance Communicators Marketing Corp., 12 Cal. App. 4th 1249, 1257 (1992) (“At a minimum, an insurance agent has a duty to use reasonable care, diligence, and judgment in procuring the insurance requested by its client.  An agent may assume additional duties by an agreement or by holding himself or herself out as having specific expertise.”); Williams v. Hilb, Rogal & Hobbs Ins. Services of Calif., Inc., 177 Cal. App. 4th 624, 635–636 (2009) (holding that a special duty will arise when an agent holds himself out as having specific expertise.)

Insurance bad faith claims can be potent weapons for insureds or beneficiaries who have been mistreated by insurance companies in the handling of their insurance claims.  Knowing who can sue and be sued is therefore important to understand if you are considering an insurance bad faith lawsuit.

“A little over a year ago, I took my oath as Insurance Commissioner and pledged to make my Administration one of action,” Commissioner Jones said. “I can confidently and proudly say that the Department has fully lived up to that pledge. We have achieved a number of critical successes on behalf of California’s consumers consistent with our vision to be the most effective consumer protection agency in the nation.”

Major Accomplishments of 2011:

Implementing Health Care Reform

The Patient Protection and Affordable Care Act (PPACA) signaled a new day for health care in America. Commissioner Jones has made it a priority of his Administration to implement health care reform.

Literally minutes after being sworn in, Commissioner Jones issued new regulations that require health insurers in the individual market to use a larger percentage of the premiums they collect from Californians to deliver actual medical care, instead of overhead and profit. Then Commissioner Jones successfully sponsored Senate Bill 51 (Alquist), holding health insurers selling to small and large businesses to a similar standard.

 Commissioner Jones also issued regulations requiring health insurers to cover children with pre-existing conditions. These regulations will help thousands of California children get the care they deserve without sending their families into financial ruin.

Jones issued regulations preventing “medical rescissions” and establishing a notice and hearing process for consumers. He also oversaw CDI’s review of health insurance policies for conformance with health care reforms such as the elimination of lifetime limits on benefits and eliminating co-payments and co-insurance requirements for preventative services.

Fighting Excessive Health Insurance Premium Increases 

The battle to prevent excessive health insurance rates escalated early in 2011 when health insurers proposed new rates that would have saddled consumers with annual cumulative premium increases of up to 87 percent. Although the Insurance Commissioner does not have the authority to reject excessive rate increases, Commissioner Jones was able to reduce health insurance premiums by $107 million this year by using existing, though limited, review authority.

Commissioner Jones continued the fight to obtain legal authority to protect consumers from excessive health insurance rate increases. He sponsored AB 52 (Feuer) which would give the Insurance Commissioner real authority to reject excessive health insurance rate increases. This authority currently exists for other lines of insurance including auto, homeowners, property, and casualty, and it is imperative to secure the same authority over health insurance. The bill cleared the Assembly and has made it through all Senate committees and is now eligible for a vote on the Senate floor in January.

 Protecting seniors

Seniors, among the most vulnerable members of communities, often fall victim to predatory scams. Commissioner Jones succeeded in establishing some new protections for them. The Governor signed two important CDI-sponsored consumer protection bills that became law in January. AB 793 (Eng) is designed to stop insurance agents and brokers from exploiting those seniors who recently acquired a reverse mortgage, by inappropriately inducing them to tie up those same funds in unsuitable annuities or other products.

The second law, AB 689 (Blumenfield), more broadly protects seniors and others from the sale of unsuitable annuities.

Premium Rate Savings for Consumers

CDI received more than 7,000 rate, rule, and form filings for property and casualty lines of insurance through December 31, 2011. CDI rejected $50 million in rate increases sought by property and casualty insurers and on top of this obtained close to $398 million in rate decreases using the authority of Proposition 103, for a total annual savings going forward of $448 million for California ratepayers.

New Workers’ Compensation Pure Premium Benchmark

Recognizing the importance of providing timely and meaningful information to employers about workers’ compensation insurance cost trends, Commissioner Jones directed a revamping of the “pure premium” benchmark process. Pure premium is the portion of the workers’ compensation premium needed to cover the cost of claims. While the Commissioner does not set workers’ compensation insurance rates, each year the Commissioner is asked to recommend a pure premium benchmark which helps employers and insurers better understand cost trends in the market. Thanks to the new process established by Commissioner Jones, a pure premium benchmark was approved for the first time in three years, one which is tied to what is actually happening in the market.

Protecting Homeowners from Underinsurance

With natural disasters like wildfires an unfortunate fact of life in California, Commissioner Jones issued new regulations to protect homeowners from being underinsured. The regulations include setting appropriate disclosure standards for agents and brokers who sell homeowners’ insurance and estimate replacement costs.

Rooting Out Fraud

From January through December 2011, CDI’s Enforcement Branch racked up more than 784 arrests for crimes that included auto insurance fraud, fiduciary theft, embezzlement and workers’ compensation fraud. As a result, the courts ordered $13.2 million in restitution due to the investigative actions we took against brokers, agents and producers.

CDI also filed lawsuits against pharmaceutical company Bristol-Myers Squibb for showering doctors with illegal kickbacks to get them to write more prescriptions and against Sutter Hospitals for bogus anesthesia billings. Both of these proceedings show CDI’s deep commitment to go after fraud that causes undue financial strain on California’s health care delivery system.

Making Sure Life Insurance Benefits Are Paid to Beneficiaries

Commissioner Jones held a joint investigative hearing with Controller John Chiang into life insurer death benefit payment practices. The hearing revealed that life insurers with access to the Social Security Administration’s “Death Master File” are not using information about deaths to trigger payments to life insurance beneficiaries. Jones has opened, with other insurance regulators, an investigation of the 10 largest life insurance companies to determine whether they engaged in unfair practices in the payment of death benefits under life insurance policies and annuities. 

Other Notable Achievements

•    Nine CDI-sponsored consumer protection bills were enacted, including bills to protect consumers from being unwittingly enrolled in life insurance “retained asset accounts” and to protect California businesses from being dragged at their cost to other states to resolve disputes with insurers;

•    The Commissioner approved a 12 percent average decrease in residential earthquake insurance rates; and a new component of earthquake insurance that allows homeowners to insure their personal property up to $2,500 without having to first meet the larger deductible requirements of the structure itself;

•    Jones initiated an enforcement action against Blue Shield of California for failing to comply with the California Mental Health Parity Act, and supported legislation, signed by the Governor, to require health insurers and HMOs to cover a proven form of treatment for Autism;

•    CDI issued guidance requiring health insurers to provide all financial documentation related to health insurance rate increases for review by CDI;

•    Commissioner Jones initiated review of medical malpractice rates paid by doctors, nurses, hospitals and clinics;

•    The Commissioner hosted two consumer summit meetings to solicit input from leading consumer organizations;

•    CDI initiated a pilot project in cooperation with the California Department of Child Services, encouraging California insurers to help make a significant difference in the lives of children by voluntarily agreeing to offset insurance benefit payments against delinquent child support payments;

•    The Commissioner initiated actions that can make progress on improving the environment by approving an auto insurer’s application for Pay-As-You-Drive auto insurance; conducting a Green Insurance Summit; and leading efforts at the National Association of Insurance Commissioners (NAIC) to measure the extent to which insurance companies are responding to climate change and global warming;

•    Commissioner Jones also sponsored legislation signed into law to extend the sunset date on the California Organized Investment Network’s (COIN) Tax Credit Program to January 1, 2015. This program encourages investment in underserved communities;

•    CDI successfully took over a troubled workers’ compensation company (Majestic Insurance), developed a rehabilitation plan, and transferred the financially troubled company and its business to a healthy insurance company, with no interruptions in coverage for policyholders.

 “We have made significant progress for consumers this year,” Jones said. “I look forward to another successful year in protecting consumers and making sure that we have healthy insurance markets.”

The Huffington Post, in a very interesting article entitled, “Insurance Claim Delays Deliver Massive Profits To Industry By Shorting Customers” reports that since the mid-1990s, “a new profit-hungry model, combined with weak regulation, has upended that ancient social contract” between insurers and claimants. 

The change started, according to the article, when consulting giant McKinsey & Company sold Allstate and other leading insurance companies on a “new system to boost the bottom line.”  The article states that rather than adjusting claims the traditional way, which gave claims managers wide latitude to serve customers, insurers embraced a computer-driven method that produced purposefully low offers to claimants.

The article explains that this strategy “put profits above all” and insurers like Allstate have certainly gained: Allstate made $4.6 billion in profits in 2007, double its earnings in the 1990s.  The stunning increase, the article quotes Russ Roberts as stating, came through "driving down loss values to an average of 30 percent below the actual market cost" -- that is, paying dramatically less on claims.  Roberts told the Huffington Post that, by his estimate, the companies that take in 70 percent of total insurance profits in the United States “now abuse their obligations to their policyholders.”

According to NAIC data[https://eapps.naic.org/documents/cis_aggregate_complaints_by_reason_codes.pdf], claim delays have long been the most frequent cause of policyholder complaints.  As of Nov. 28, 2011, the NAIC had received 11,053 delay-related complaints this year alone, comprising almost a quarter of the year's total complaints.  This data only reflects confirmed complaints -- the ones that the state insurance commission has investigated -- so the actual number of delayed claims is likely much higher.

This article is interesting reading for all consumers who buy insurance. 

The attorneys at McKennon Law Group PC LLP took immediate action and filed lawsuits in federal court against the companies which were infringing on TriPharma’s exclusive license through product sales of their own, and filed claims in JAMS arbitration against Imagenetix for, among other things, fraud, breach of contract, and injunctive relief, seeking damages as well as reinstatement of the exclusive license agreement

Even more significantly, the McKennon Law Group PC LLP attorneys were able to obtain the injunctive relief they fought for so vigorously on behalf of TriPharma.  The arbitrator reinstated TriPharma’s exclusive license agreement, extended the term of the agreement, provided a six month abeyance of minimum obligations so that TriPharma could get its business back up and running, and enjoined Imagenetix from selling its weight loss product, or any other weight loss product based on the patent or clinical studies, to any other company.  The award effectively won back the rights that TriPharma had bargained for and which had been stolen by Imagenetix through its various activities relating to the sales and distribution of the product.

The victory for TriPharma and the McKennon Law Group PC LLP law firm was a complete success.  Not only did TriPharma recoup the ability to conduct business, but TriPharma and its CEO were vindicated and awarded significant monetary compensation for the fraud perpetrated on him and his company.  In issuing the award, the arbitrator gave particular mention to McKennon Law Group PC partner Robert J. McKennon:

McKennon l Schindler achieved substantial success in this litigation and its chief trial attorney Robert McKennon demonstrated exceptional skill in cross-examining [Imagenetix’s CEO and other employees].  Indeed, those examinations exposed the lack of credibility of those witnesses, which was a decisive factor in the Arbitrator’s findings and rulings.

Robert J. McKennon and Reid A. Winthrop tried the case on behalf of TriPharma.    

Chong Hing Bank Limited (Bank), a Hong Kong financial services company, began making loans to Elephant Talk Limited (ETL), a Hong Kong telecommunications company, beginning in 1996.  In 2002 ETL reverse acquired a California public shell company called Staruni Corp. in a stock-for-stock exchange in which Staruni became the parent company and ETL became its wholly-owned subsidiary.  Staruni changed its name to “Elephant Talk Communications, Inc.” (Elephant Talk) in connection with the reverse acquisition.

Elephant Talk and the Bank stipulated to a bench trial on all issues.  After a five-day bench trial, the court issued a decision in favor of Elephant Talk on the issue of successor liability, on the first cause of action for breach of contract, on the second cause of action for open book account, and on the Bank’s proposed amendments to add causes of action for intentional misrepresentation and negligent misrepresentation.  The court entered judgment in favor of Elephant Talk on November 2, 2011.

Eric J. Schindler and Scott E. Calvert tried the case on behalf of Elephant Talk.

In his article entitled “Don’t take a health insurer’s rejection as the final word on your medical claim,” Tom Murphy of the Associated Press cites a recent report from the Government Accountability Office which found that overall, appeals have an approximately 50% success rate.  The article lists a number of actions policyholders can take to increase the likelihood of success on appeal.  Murphy mentions obtaining and submitting copies of the entire medical file, enlisting a treating doctor to write letters explaining the policyholder’s relevant medical history, understanding policy language, writing a detailed letter with supporting records and information and complying with all deadlines.

Here is Murphy’s article verbatim:

FIGHTING AN INSURANCE CLAIM DENIAL CAN PAY OFF

By Tom Murphy, The Associated Press
Published Friday, April 8, 2011

INDIANAPOLIS — Don't take a health insurer's rejection as the final word on your medical claim.

Appeals can have a surprising success rate if patients shape a good argument with help from their doctor, some research and a healthy dose of persistence. Insurers always offer at least one chance to appeal when they deny a claim. Here's how to make your case.

For starters, what are the odds of success?

A recent report from the Government Accountability Office found a 50 percent success rate of appeals to insurers in some states.

Insurance companies often make the initial decision to deny a claim based limited information like a diagnosis or procedure code from a claim form the doctor submits. They rarely see a patient's file for that first decision, said Jennifer Jaff, executive director of Advocacy for Patients with Chronic Illness Inc., a non-profit that helps patients with claim denials.

"When you provide them with additional clinical information ... it may turn out to be a very easy decision for them," she said.

What are the first steps to take after receiving a rejection?

Learn as much as you can about the reason. Get the policy language and any information the insurer used to make its decision. Patients are entitled to this, so persist if the insurer moves slowly.

It's also important to know the insurer's appeal process. This should be laid out in the letter you receive telling you about the rejection. Understand the deadlines for appealing.

"These deadlines are serious," Jaff said. "I've never seen an insurance company grant an extension."

How do you build your case?

Write a detailed argument with records backing up your claims. Enlist your doctor's help.

If the insurer says it doesn't have to pay because your condition existed before your coverage began, a doctor may be able to argue otherwise.

The insurer may say the treatment isn't medically necessary. Your doctor can illustrate how all alternatives were exhausted before you started receiving the treatment in question.

Rely on more than just a doctor's statement.

"Insurance companies do not assume everything a doctor says in a letter is 100 percent true and accurate," Jaff said. "What they really want to see are the medical records."

Patients should be prepared to send their insurer any of those confidential records that would support their case.

If the insurer deems a treatment experimental, some additional research may be needed, and your doctor can help there as well. Medical journal articles can show an insurer that your treatment is a widely accepted practice.

If the doctor is unwilling or unavailable for help, Jaff recommends for research the National Institutes of Health website www.pubmed.gov . Patients can use it to search medical journals around the world for articles on their treatment.

Abstracts, summaries and some articles are free. Those that are not can be pricey, costing between $30 and $50 to buy online. But patients also can check with a medical library near them for copies.

Asking for a compassionate allowance can be another strategy for patients. Some insurance policies will make exceptions to cover something if it could be lifesaving.

An employer that offers a self-funded plan also might be persuaded to overrule the insurer and permit coverage, but Jaff said this is rare. Self-funded plans are generally used by big employers. In those cases, they provide the actual insurance and the managed care company just administers the plan.

Ask your human resources department if your company plan is self-funded.

What are the keys to a successful appeal?

Keep your emotions out of the argument and give the insurer something new to consider. Avoid rehashing information the company already has.

"It's a business decision, it's not personal on the insurer's side," said Pat Jolley of the Patient Advocate Foundation, another non-profit that helps people handle payment problems.

Know your insurer's appeal process. Some may offer a couple rounds of internal reviews and provide a specialist to examine your claim. That means you can have an oncologist review your claim for cancer treatment.

Keep detailed notes of your contact with the insurer, including which representative you spoke to and when.

Send appeals by certified mail to document when an insurer receives them in case the company later claims you missed a deadline.

Communicate in writing whenever possible. This keeps you from having multiple phone conversations with different insurance representatives who provide different answers.